Updated for tax year 2023.
Did you profit from selling a house, some investments, or even a car this year? If so, you’ll likely need to report the sale on your income tax return due to the long-term capital gains tax.
Fortunately, if your sale qualifies as a long-term capital gain, the taxes are less than what you’d pay on your ordinary income, such as wages.
At a glance:
Long-term capital gains tax is lower than ordinary income tax.
You must own the asset for over one year to qualify for a long-term gain.
Tax rates for long-term gains range from 0-20%, depending on income.
Do I have a long-term capital gain?
To qualify as a long-term gain, you must own a capital asset, meaning that house, investment, or car you sold, longer than one year. In that case, you generally qualify for the special long-term gain tax rates. A short-term capital gain includes the profits of an item you sold that you owned for less than one year. That gain is taxed at the same rate as your ordinary income.
You do not owe taxes on assets you sold at a loss. However, you can use losses to offset capital gains. You’ll first use losses to reduce gains of the same type — for example, you must first use long-term losses to offset long-term gains. Once losses are applied against the same type, any remaining losses can then offset gains of the other type.
Most things you own, such as your car, investments, and real estate, are capital assets. And when you sell those assets, a capital gain or loss is created.
Long-term capital gains occur when you:
Earned more from the sale of a capital asset than your basis in the asset
Kept the asset for longer than one year
Note: Gains on certain types of assets, such as collectibles and property for which you have taken depreciation deductions, are subject to their own special rules. For instance, long-term capital gains on collectible assets can be taxed at a maximum rate of 28%.
How much tax do I owe on my long-term gain?
You can pay anywhere from 0% to 20% tax on your long-term capital gain, depending on your income level. Additionally, capital gains are subject to the net investment tax of 3.8% when the income is above certain amounts.
Long-term capital gains rates are applied based on ordinary income amounts. The brackets for 2023 are:
Married filing jointly
Married filing separately
Head of household
$0 to $44,625
$0 to $89,250
$0 to $44,625
$0 to $59,750
$44,626 to $492,300
$89,251 to $553,850
$44,626 to $276,900
$59,751 to $523,050
$492,301 or more.
$553,851 or more
$276,901 or more
$523,051 or more
Example: Say you bought ABC stock on March 1, 2010, for $10,000. On May 1, 2023, you sold all the stock for $20,000 (after selling expenses). You now have a $10,000 capital gain ($20,000 – 10,000 = $10,000).
If you’re single and your income is $65,000 for 2023, you would be in the 15% capital gains tax bracket. In this example, you pay $1,500 in capital gains tax ($10,000 x 15% = $1,500). That amount is in addition to the tax on your ordinary income.
Are there exceptions to paying taxes on long-term gains?
One caveat does exist with the sale of personal residences. You may not have to pay tax on a gain of up to $250,000 from the sale of your home. That rule applies if you have owned and lived in the house for at least two of the last five years or if you meet certain exceptions.
If you’re married, you can exclude up to $500,000 in gain from the sale of your home as long as you meet the IRS requirements. We discuss the requirements for this more in 5 Tax Tips for Homeowners.
Do I have to pay the additional tax on net investment income?
You may have to pay an additional 3.8% tax on net investment income.
You pay this tax if your modified adjusted gross income (MAGI) is $200,000 or more ($250,000 if filing jointly or qualifying surviving spouse and $125,000 if married filing separately). You can reduce your investment income for that tax by deducting investment interest expenses, advisory and brokerage fees, rental and royalty expenses, and state and local income taxes allocated to your investment income.
The 3.8% tax applies to investment income, such as interest, dividends, capital gains, rental, and royalties. It’s paid in addition to the tax you already pay on investment income.
What should you know before you sell?
If you’re considering selling assets, such as stock, it’s best to plan ahead. A little planning now can save you a lot of capital gains tax when you file your return.
Consider these options:
Don’t sell before the profit qualifies as long-term. Plan the sale of an asset that’s gone up in value to be a long-term gain. Make sure to hold the investment long enough to qualify for long-term status. For most assets, that’s more than one year. But don’t be too hasty to sell when the year is up. The IRS guides say you must own the asset for “more than one year.” If it’s exactly one year when you sell, there’s a good chance they could classify it as a short-term sale.
Don’t hang on to losing investments just to avoid taking a loss. Consider selling assets at a loss to offset capital gains. The IRS only taxes your net capital gain, and you can reduce your gains by deducting your capital losses. You can even deduct up to $3,000 in capital losses from your ordinary income if your losses exceed your capital gains.
There are worse things than owing taxes. One of them is Losing money or keeping it in something that doesn’t go up in value.
Give stock that has gone up in value to charity. Donating stock to charity gives you a tax deduction for the amount it’s worth now. Also, you don’t have to pay capital gains tax on it.
Don’t sell all at once. Even if you’re not normally in the higher income tax bracket, one large sale can place you there for the year if you’re not careful. You might want to sell some stock one year and wait until January to sell some more.
Take the proceeds as an installment sale. If you have real estate you’ve been holding for 30 years, don’t let the sale bump you into the top tax bracket in the year of the sale. Consider making an installment sale. Besides saving taxes, you’ll create a steady flow of income for yourself.
Plan for a 1031 exchange. If you sell an asset and purchase a “like-kind” property, you may qualify to put off paying tax on the gain from the first property. The idea behind this rule is that you don’t realize a gain when you sell one asset to buy another. Note that as of 2018, only “real property” (real estate) qualifies for this type of exchange — personal property does not.
Look for other ways to reduce your income tax bracket in the year of the sale.If you’re selling a substantial capital asset for a profit, that may be a good year to sell a different asset at a loss, contribute more to charity or a retirement account, invest in your business, or take other tax-saving steps.
Buy and hold. The simplest way to put off paying taxes on capital assets is to hang on to them. Perhaps the capital gain rate will come down, or you may be in a lower tax bracket in a later year, such as after you retire. In any case, you can let your investments continue to grow by simply leaving them be.
This article is for informational purposes only and not legal or financial advice.
The post Long-Term Capital Gains Tax: How Much Tax Will I Owe? appeared first on TaxAct Blog.
– Tax Tips and Tax Planning Resources | TaxAct Blog